The Investment Implications of the Migration Surge
In last week’s article and podcast, I looked at the potential path for the U.S. economy over the next two years, noting that the outlook suggested a very tight labor market throughout. This would be a generally healthy outcome for the country, boosting economic growth and productivity and supporting solid wage growth. To the extent that it maintained pressure on profit margins and limited monetary easing, it would be less favorable for investors. However, a number of readers asked the very reasonable question of whether my analysis took account of the recent migration surge at our southern border.
The answer is that it doesn’t, to the extent that this surge exceeds assumptions made by the Census Bureau in projecting the growth in the working age population. It should be recognized that a rise in illegal immigration and asylum seekers would normally have more significant social and political implications than any impact on the overall macro economy and financial markets. However, the recent migrant surge has been so dramatic that, while trying to avoid the heated political debate that surrounds this issue, it is worth considering the magnitude of the surge, how long it could continue and what it might mean for labor supply, wage growth, consumer demand, corporate profits and Fed policy.
Understanding the Numbers
To understand the implications of the migrant surge it is first necessary to understand the numbers.
First, U.S. Customs and Border Protection reports a total of 3.2 million encounters with migrants in fiscal year 2023, (which ended last September), up 16% from a year earlier and almost three times the 1.2 million encounters seen in the last fiscal year before the pandemic. Data from the first four months of fiscal 2024 show a further increase, with the number of encounters now on track to reach 3.7 million this year, with almost 80% of these encounters occurring at the southwest land border (as opposed to the coasts, airports and Canadian border). While some of these migrants are expelled, in October 75% of those entering through the southwest land border were paroled, released or, in the case of minors, handed over to the Department of Health and Human Services. Those paroled or released typically claim asylum and are given a notice to appear at immigration courts.
Of course, this has led to an enormous bottleneck in those courts. Immigration judges succeeded in closing 672,000 cases over the course of fiscal 2023, a 55% increase from the year before. However, because of the surge, as of January 2024, there was a backlog of over 3.3 million cases waiting to be adjudicated. At the current pace of processing, it would take more than five years to clear this backlog. even before considering new cases.
Meanwhile, these asylum seekers find themselves in a legal limbo. The vast majority of migrants are single adults and have come to the United States to work. Moreover, since asylum seekers are ineligible for federally funded benefits such as food stamps and Medicaid, their need to work is urgent. However, a provision in the 1996 immigration reform act, designed to discourage asylum seeking, stipulates that work authorization can be granted no earlier than 180 days after a person has filed an asylum claim.
This situation is obviously resulting in significant stress for migrants and the communities in which they have arrived, as well as straining the budgets of cities, states and private welfare organizations. However, it is also leading to a surge in labor supply. In fiscal 2023, U.S. Citizen and Immigration Services approved over 2 million applications for employment authorization, up over 70% from a record 1.2 million the prior year. It should be noted that these numbers include other initial applications for employment authorization for foreign nationals through more traditional avenues.
Given the lag with which these numbers trail migrant encounters, the political logjam in Washington, and the draw of a very strong U.S. labor market, it seems likely that both fiscal 2024 and fiscal 2025 will see similarly huge numbers of new immigrants with authorization to work. This is, of course, on top of a continued stream of new immigrants into the United States who have entirely evaded federal authorities.
The biggest macro impact of the migrant surge should be in labor supply. Official Bureau of Labor Statistics numbers show an increase in the population aged 16 and older of 1.6 million between January 2023 and January 2024, and an increase in the labor force (that is, those working or actively looking for a job) of 1.4 million over the same period. However, this estimate is based on population projections from the Census Bureau that assume net immigration of roughly 850,000 people per year between 2023 and 2025, of whom roughly 600,000 or 70% are between the ages of 18 and 64. The more than 2 million approved applications for immigrant work authorization in fiscal 2023 suggests that the Labor Department may be undercounting the current growth in the labor force by more than a million people per year.
Assuming this trend continues for at least the best part of the next two years, it could have a significant impact on the U.S. labor market. At the end of 2023, there were 9.0 million job openings in the United States, up from 6.7 million four years earlier. These 9.0 million openings included 449,000 jobs in construction, 662,000 in retail, 995,000 in leisure and hospitality and 1.8 million in health care and social assistance. A lack of qualifications and language difficulties could prevent new immigrants from filling many of these jobs. However, over time they could fill a meaningful number, boosting payroll employment while reducing both measured job openings and the growth in average hourly earnings.
The migrant surge could also have an impact on housing. Over 60% of the migrants encountered at the southern border last year were single adults and many of these may initially stay with relatives or friends in the United States. However, over time, as they earn money and build families, they will like add to housing demand. It should be stressed that this will likely be a lagged effect and will be counteracted by weak demographic growth among the native-born population.
Outside of housing, increased immigration should bolster overall consumer spending. However, it is important to recognize that, because of their limited incomes, the increase in consumer demand from higher migration will be far less than their impact on raw population numbers. This is also true of measured GDP – the assumed economic output produced by a doctor relative to, say, a retail employee, is roughly proportional to their incomes. The migrant surge will likely be much more visible in the employment data that the GDP accounts.
Finally, it should be noted that government data will continue to have a hard time capturing some of the impact of the migrant surge. New immigrants will almost certainly be undercounted in the household employment survey because many will lack a fixed address. Those who lack authorization to work or who have language barriers likely won’t fill out government surveys. Those who get paid in cash will, presumably, be less visible to the IRS.
Clearly the current surge in immigration is chaotic, putting additional strains on border states and big cities, leaving many migrants in very difficult personal circumstances, and fomenting further political division. Clearly, the nation urgently needs comprehensive immigration reform to address these issues. However, from the broader perspective of the U.S. economy, it appears that the migrant surge is as likely to reduce inflation, due to its impact on wage growth, as increase it, due to its impact on aggregate demand. It is unlikely to provide a strong boost to GDP but even a mild boost could benefit corporate profits. And it is unlikely to speed up or slow down the Federal Reserve as they begin to cut interest rates later this year. So while there are many social and political reasons to be concerned about the migrant surge, its net impact on the investment environment should remain surprisingly muted.
 Source: https://www.uscis.gov/sites/default/files/document/data/i765_application_for_employment_fy23.pdf and https://www.uscis.gov/sites/default/files/document/reports/i765_application_for_employment_fy23_22_annual_report.xlsx.